This morning, Jamie Porteous, Executive Vice President & Chief Commercial Officer of Cargojet, presented during day three of RBC’s Canadian Automotive, Industrials & Transportation Conference.
No indication of macro weakness
Key from our conversation today with CJT was that mgmt is seeing no indication of demand weakness, except for a moderate slowing of eCommerce volumes post pandemic. In particular, CJT's adhoc and charter business remains strong in addition to CJT's ACMI business on the back of its new agreement with DHL. Overall, we are positive on CJT's outlook, and view its strategy as positioning the company for growth as well as mitigating risk in the event of a freight recession. Key highlights below.
eCommerce outlook solid. Despite a recent slowdown in eCommerce volumes post pandemic, mgmt remains positive on the medium to long- term outlook due to the low eCommerce adoption rates in Canada versus other developed nations. Mgmt noted that Amazon believes Canada is its fastest growing region, which we view as supporting our favourable outlook in the Domestic Overnight business. Amazon is also looking for additional aircraft, which we note CJT was able to provide with no capital investment as Amazon operates during the day versus CJT's core business, which operates overnight. CJT also spoke to the long-term contracts and long-term track record of operating on time as erecting significant barriers to entry. Overall, we came away positive on the opportunity in CJT's core Domestic Overnight business as commentary largely reinforced our favourable outlook.
International / ACMI strategy a differentiator in our view. We highlight CJT's strategy in the international segment as a differentiator. We believe that 1) the company's deal with DHL significantly reduces risk associated with potential over capacity and 2) CJT's focus on undeserved international lanes (i.e. Cologne to N.A.) will protect volume in the event of a downturn. We expect this strategy to drive growth and reduce volatility going forward.
Pricing environment robust
Mgmt spoke to the solid demand environment in the international business as well as to pricing tailwinds that they expect to drive airfreight rates over and above pre-pandemic levels longer-term. Our view is that while passenger volumes will recover, belly capacity will remain constrained due to increasing use of narrow body jets. Key is that demand is growing over and above the recovery in belly capacity due to eCommerce demand - a dynamic we expect to keep airfreight pricing elevated, although off current peak rates, longer-term and which we view as key positive for CJT as it accepts delivery of its expanded fleet. In addition, mgmt highlighted opportunity to increase price on CJT's non-contracted Overnight business, which accounts for approximately 20% of its Overnight capacity - a positive going forward in our view.
Better utilization driving incremental margin
eCommerce volume increasing aircraft utilization. Mgmt highlighted increased fleet utilization on the back of higher B2C volumes as eCommerce packages are typically shipped during the day versus other packages in CJT's overnight business that are shipped between 1 A.M. and 5 A.M. This has allowed mgmt to improve fleet utilization as well as opened capacity for CJT to capitalize on "one-off" demand related to the flooding in B.C. and an increase in shipments of test kits in Q1, as two recent examples. We view the opportunity for CJT to further increase utilization as underappreciated, and a positive for the company going forward.